Big accounting: EY knows there are too few firms to fail

Between them, the world’s big four accounting firms employ a million people. Not quite as much as our beloved NHS, but still too big to manage, even split four ways. So one of them is planning to break its management consulting business away from the traditional audit. This is EY, formerly Ernst & Young, and it’s not hard to see why the bosses rather fancy a break-up.

Firstly, there is the little matter of a magnificent payday from bringing in outside capital, perhaps $8m each for those at the top. Rather more pressingly, EY as it currently stands looks alarmingly accident prone. The latest pooper involves paying a fine of $100m to resolve claims that dozens of its employees cheated on an ethics exam and that it misled investigators.

Goodness, an audit firm cheating on ethics! “It’s simply outrageous that the very professionals responsible for catching cheating by clients cheated on ethics exams of all things,” said the director of the SEC’s enforcement division. In the context of the EY machine, $100m is little more than a rounding error and, hey, we all make mistakes. Perhaps everyone was doing it.

Whatever, there are far bigger potential liabilities in front of this firm. Most famously, it was the auditor of Wirecard, Germany’s biggest-ever fraud (so far as we know) which went undetected for years until Neil Campling of Mirabaud Securities and Dan McCrum of the FT broke the story. Then there were the terrible twins called NMC Health and Finablr, one big enough for the FTSE100 and the other in the FTSE250. The accounts were opaque and, it now seems, fictional. There were $4bn of undeclared debts and a $1bn claim is cooking here.

Any one of these accounting failures might have been enough for an Enron moment, the scandal that did for Arthur Andersen, but it seems there’s also a nasty hole at the other end of the EY boat. A brilliant story in the FT discloses that last summer EY had been asked to value NSO Group, an Israeli spyware maker. Stories of abuse of its hacking tool to target journalists were circulating, but without even visiting this secretive company, EY decided it was worth $2.3bn.

This was not only a heroic increase from the previous guess of $1.6bn (tied to an offer that did not proceed) but ignored an adverse report that came out just before publication of EY’s effort. A few months later NSO needed an emergency cash injection to pay the staff. In November 2021 the US blacklisted the company. In December its lenders considered it insolvent. It now appears to be worthless.

Still, never mind. Because there are only four global accountancy firms, they are too few to fail. A world with only three global accountancy firms would further reduce competition from today’s inadequate level. If EY – in one piece or two – was bankrupted by having to pay a proper price for its serial failures, then the world’s taxpayers would be forced to pick up the bill. A collapse would also take years to sort out, and by then, of course, today’s partners will have long since departed with their winnings.

A new home for Formica

It must be a great comfort to the shareholders in Jupiter Fund Management to learn that Andrew Formica has “done a lot of what I set out to do”, as he told Citiwire. Since becoming CEO in 2019, the share price has gone from around £4 to 150p, so we can only imagine what would have happened had he not been in charge.

We don’t yet know what the grateful shareholders will give him as a going-away present when he leaves in October, but he is unlikely to be traveling back Down Under in steerage. Jupiter used to be one of the more respected names in fund management, but then so did Henderson, the business Formica rammed into the US shop Janus in his previous job. That ended badly too. The fun has been lacking in fund management in recent years, with even shares in Schroders, the market leader here, down by a third from their peak. Those running the money are hardly bothered. They continue to rake in rewards beyond the dreams of mere holders of the stock.

Gumming up the works

In the parallel universe occupied by the Committee on Climate Change, we are embracing our smart meters, insulating our leaky homes and driving our electric cars. In the actual world, so the CCC decided this week, we’re an awful disappointment. Chairman Lord Debden says the spirit is willing, but the flesh is weak.

Rather than admit that we haven’t a hope of meeting the targets we have legally bound ourselves into, his report points to gaps in policy and disappointing progress in reducing CO2 emissions. It seems a long time since we were told that transforming to this fantasy zero-carbon economy would be painless, while creating thousands of jobs in our increasingly green and pleasant land.

There is scant evidence that this is going to happen. The Committee has noticed that replacing the £28bn raised from fuel duty is a bit of a problem, so we need pay-per-mile for all cars. Better home insulation is a jolly good idea, too. Who’d have thought it?

Elsewhere, the committee recommends more pain now, rather than much more pain later, roughly the opposite of how normal governments behave. Oh, we should fly and drive less, and eat less meat. Thus spake Lord Debden, who as John Selwyn Gummer once fed his daughter a hamburger in an effort to convince us they were safe to eat. Not for the planet, it seems.

Don’t miss the latest edition of A Long Time In Finance, my podcast with Jonathan Ford. On Spotify and Apple apps. Everything you never knew you wanted to know about QE but were too afraid to ask.